Bad image is good for business

W hile other sectors are struggling, current conditions are suiting the Tep market just fine. Times of low interest rates and low equity returns traditionally favour the trading of endowment policies and the market has got further impetus from poor public perception of endowments and regulatory change on the open market option. The Tep market has been hamstrung by a shortage of policies to trade but these factors are all contributing to an improvement on the supply side.

On top of the poor performance of equities over the last 18 months has come weeks of extreme market volatility in the period following the events of September 11 and some market-makers are reporting investor uncertainty translating into record business.

PolicyPlus International sales and marketing director David Carrington says: “Since September 11, we have seen an increase in demand with the flight to safety. We are going to have our best ever month for investment sales in October.”

Tep dealers hate to see an endowment policy surrendered when they could generate more on the open market option but at present the ratio of policies surrendered to those traded is still 2-1.

Turning this ratio round will be like changing course on a supertanker but the signs are that the direction in the market is changing.

Surrenda-Link chief executive and Association of Policy Market Makers chairman Paul Sands says enquiries to APPM members in 2001 are 60 per cent up on last year month on month. He says: “Members are seeing stock lists on websites increasing considerably and requests from IFAs for stock lists are on the up.”

There is a delay between enquiries and deals as policyholders test the water. This has been shown by the response to the warning letters sent out advising mortgage endowment policyholders of shortfalls. Sands says: “After the traffic light letters, the number of customer enquiries has grown enormously but the number of customers completing transactions did not go up proportionally. People were hedging their bets but now they have had those final letters and are coming back and saying &#39let&#39s do it&#39.”

The PIA&#39s change of heart on the open market option is going to add to the momentum. Regulatory Update 85 suggests that life offices should advise policyholders of the option and it is hoped that this will be made law when the consultation process on the rule change is completed. Tep providers are pleased that life offices have, in general, co-operated with the directive, and there are no reports of refusals to cooperate.

Sands says: “We assume that Consultation Paper 106 is the forerunner of legislation which would mean life companies would be instructed rather than advised to notify about the open market option.”

The APMM realises this co-operation with life companies must continue for the sector to evolve successfully. It is looking to improve the process. Sands says: “We want to develop a slick method of dealing with the transfer. We need to use new technology to get round the paperwork.”

Tep providers are aware that while this market is growing, the growth will not last for ever as life companies pull out of writing new endowment business. The Tep Exchange director Ami Weitz says: “We have a good 10 years of supply out there. There are very few endowments being taken out for mortgages and Tep market-makers are all aware that they need to look around to find another product to deal with.”

But for the moment, low equity returns and interest rates, poor public perception of endowments as a mortgage payment vehicle and promotion of the open market option will all support growth in the market.

The mortgage market is key to the Tep sector. As new trends come in mortgages, those who move house want to try out the newest fashion of lending vehicle. On divorce, policies held in joint names will continue to be traded if parties realise they cannot pay off the other party&#39s share and maintain the payments, and there will be those in their late 50s who can pay off their mortgage and want to stop paying into the policy.

Insurance Policy Trading Company director Elaine Bradburn believes endowments could even make a comeback, with the current resurgence in the Tep market leading the product&#39s rehabilitation.

He says: “I think eventually that we will go full circle. Unit-linked endowments were popular in times of high interest and high investment returns but now that unitlinked products are adversely affected.I think with-profits could come back.”

Certainly, the reputation of with-profits is confused. The worse the reputation that with-profits gets with the general public, the more policies come on to the market and the more the clever investor can benefit from picking up a bargain. IFAs are not alone in being affected by adverse press surrounding with-profits but Tep providers want to convince them to come back to with-profits in their secondhand form.

Beale Dobie head of business development Tracey Merritt says: “IFAs have been avoiding the Tep market and associating everything that happened with endowments with traded endowments. Many IFAs do not appreciate that you can exploit this part of the market.”

Some Tep companies report unawareness of the product that extends beyond the general public to IFAs. Weitz says: “There are certainly IFAs who are not aware about Teps. They think they are maybe a niche product that is not for them. But there are around 11 million endowment policies out there and all IFAs must have clients with them.”

As the reputation of traded endowments grows as a relatively secure investment that has some of the benefits of exposure to equities, ironically this could go some way to redressing the balance of the reputation of endowment policies themselves.

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